My continuing journey into the world of finance.

I read an article last night in Military Times, about how they are looking at ways to “tweak” the military pension system to save the Pentagon some money. I would like to see how this newly proposed system stacks up value-wise to the traditional military pension currently in place. I have done a few previous posts on military pensions and what their present value might be, here and here. For those that do not currently know how the U.S. military active-duty pension system works, I will quickly summarize a basic military pension before continuing.

For service members who serve for 20 or more years, they are entitled to a pension. There are some exceptions, such as TERA, medical retirements, REDUX, etc., but we will ignore these for now and focus on the plain-vanilla pension. Under the “High-3” system, at 20 or more years of service, they will take the average monthly pay of your 3 highest earning years and base your pension payments off of this amount. The other side of the equation is the years of service. At 20 years of service, the pension benefit is 50% of the “High-3” amount. Every year after 20 years of service will add an additional 2.5% to the pension benefit. So, for example: If a service member had 23 years of service and earned an average of $4,000 a month during his three highest paid years, the service member would be entitled to 23 X 2.5% X $4,000 = $2,300 per month.

In my second post on the value of a military pension, I arrived at a present value of $23,035.55 per $100 of pension benefit. The example above would have a net present value of ($2,300 / 100) X $23,035.55 = $529,817.65

The new “tweaked” systems in the Military Times article would have a reduced pension and give out cash bonuses to compensate for the reduced pension benefit. I will consider the retirement plan (they mention a few vague ideas) that the study from the article believes would entice the enlisted ranks the most. This plan would pay three years of base-pay in a lump sum upon retirement and cap the pension benefit to no more than 25% of base-pay. Using the same service member from the example above would give a lump sum payment of $4,000 X 36 = $144,000. The pension benefit capped at 25% would be worth [($4,000 X 25%) / 100] X $23,035.55 = $230,355.50. The total net present value of the new system would be $144,000 + $230,355.50 = $374,355.50

I can see why the Pentagon would like this plan. It should save them a significant amount of money. $529,817.65 – $374,355.50 = $155,462.15 in savings for the Pentagon.

On the message boards for the article, most commenters are howling about how this is a bad deal for the service members. They see the words “save the government money” and assume it is at the service members expense. Maybe, but not so fast……The way the article is presenting this new system though, is that it could be “opted” into. It would be a voluntary choice between the current system and new system in other words. I like choices and choices have real value too. The $500-hundred-thousand-and-something pension value is only good if you live long enough to collect the checks. If you retire and choke on an olive the next day the pension is worth zero dollars. What if a service member is diagnosed with some terminal illness at the end of their military career? The new option would start to look much better then, right?

Bottom line is that choices have value and as long as the new system is not forced onto people it is a good thing.